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Egypt's currency falls to a new low

Published on NewsOK
Modified: December 30, 2012 at 1:20 pm •
Published: December 30, 2012

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CAIRO (AP) — The Egyptian pound fell to a record low against the dollar Sunday as the central bank stepped into the market to try to stabilize trading and stop an anxious public that has been buying up dollars for fear of an even bigger dive in the local currency, bankers said.

Egyptian Prime Minister Hesham Kandil talks during a press conference in Cairo, Egypt, Sunday, Dec. 30, 2012. Kandil says his country will resume talks in January with the International Monetary Fund over a $4.8 billion loan, after they were suspended during this month's political turmoil over the now-adopted constitution. (AP Photo/Amr Nabil)

The pound slid more than 3 percent on the first trading day after the central bank introduced a new dollar auction system that bankers said appeared designed to allow a "controlled devaluation" of the Egyptian pound. Many economists consider the pound overvalued and propped up by the government, which has used fast-dwindling foreign currency reserves to keep the value artificially high.

Khaled Abdel-Hamid, from Union National Bank of the UAE in Egypt, said the central bank is now directly involved in trading to stabilize the market and will probably help stop speculation on the currency by panicked buyers.

Egypt is grappling with a crippling deficit and foreign reserves have fallen to $15 billion from $36 billion in 2010, before the uprising that toppled Hosni Mubarak.

The central bank announced the new auction system a day earlier, urging citizens to "ration usage" of foreign currency in favor of the Egyptian pound. It said that foreign currency reserves, which have been hemorrhaging for nearly two years, are at a "critical" level — the minimum needed to cover foreign debt payments and buy strategic imports.

Under the new auction system, the central bank sold all $75 million on offer to banks on Sunday.

As the currency weakened, the prime minister said Egypt will resume talks in January with the International Monetary Fund after Cairo suspended its request for a $4.8 billion IMF loan during the recent political turmoil over the disputed constitution.

Fearing even greater political turmoil, President Mohammed Morsi called off tax hikes and spending cuts that were part of the economic program it submitted to apply for the IMF loan, scuttling the loan request itself. But now that the constitution has been approved in a public referendum, the government has again turned its attention to economic reforms.

Many had expected a currency devaluation as part of the IMF deal, which had gained preliminary approval in November ahead of the outbreak of the political crisis and mass street protests over the constitution.

Over the past week, fears of an imminent currency devaluation led to a rush on dollars, putting further pressure on the Egyptian pound. The worries were fuelled in part by the government's move to cap the amount of foreign currency people can take with them as they leave the country.